Are Discount Real Estate Brokers the Wave of the Future?

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A little while back Michael McClure started a conversation on in his “Raise The Bar” Facebook group asking “Does the “discount brokerage model” have a future in real estate? Has its time already come and gone? Or are its best days ahead of it?”. When I threatened to report him to the ASPCA for flogging a dead horse, Michael replied ” Bill: I was interviewed by a real estate news organization the other day on this very point. They called and asked me essentially these questions. As I attempted to answer as best as I could, I found that my own thoughts are very contradictory on the matter. Hence, this post.” How can anyone have an issue with someone admitting that they have contradictory thoughts about a business model? I can’t – but I can have an issue with the way terms are misused to provide what I believe are unrealistic expectations to consumers

A little later ( I was busy doing real estate business) I responded “The major talking point you as a real estate broker should know – There are no “discount brokerages” there are different brokerages that have different business models and supply different services for different fees. – “discount” implies the same service for less money which devalues everyone” and there dear reader, is the problem. I order to attract consumers, real estate firms that provide limited services position themselves as less expensive versions of their full service competitors. Consumers , who think that real estate agents jobs are far more simplistic than in fact they are, buy into this discount fantasy, only to find that frequently their expectations are not met, or that the limited service model won’t accomplish their goals for them.

It’s not surprising. Most consumers think that the hoof a listing agent is to put up a sign and enter the property into the MLS. With the availability of property information online, many consumers think the job of the buyers agent is to help prepare the contract on the properties that they (the consumer) have found on ZT&R. If you’re a real estate salesperson or broker reading this post, you may be shaking your head at how wrong they are , but the fact is those are the misconceptions that people operate with.

Michael responded by showing that when you googled “discount broker”, you get a number of different real estate firms positioning themselves to be found by consumers searching that term. To me, that is merely a matter of brand positioning, and not any real indication that there is a real discount involved to the consumers, or that the consumer is really saving anything.

It’s understandable that consumers  (and news media) find the topic of real estate commissions and fees fascinating and find alternatives to the traditional type of fee structure worth investigating.  After all, any percentage of a big number (and most houses sell for relatively big numbers) is itself a big number, and who doesn’t like to learn how to minimize a big expense? As a result, the conversation never ends – because no one has found a viable alternative.

Our business has, as long as I can tell, always had an uneven ability to articulate why our fees are what they are.  Some agents, unsure of why the company charges whatever their company charges, fumble and fuss and then negotiate with their managers to let them list the property for less than their company commission rate. Some agents, who are firm and clear about the value their services bring to the transaction, have no difficulty  demanding and obtaining the full commission rate determined by their firm. All of them work under the fiction that we only get paid when we get the property to the settlement table. But the reality is that in our fee structures the succesful transactions have to have enough profit in them to carry the unsuccessful transactions – the expired listings, the short sales that don’t make it to the table, and the transactions where the buyer doesn’t obtain their financing – all of the time spent on those fruitless efforts mean that the times when the real estate firm gets paid have to carry that time and expense in their fees – and any attempt to change that payment structure means that the cost of failure would have to be shifted to the consumer – as it is in almost every other professional service.

Flat fee structures don’t address that. “MLS Only” brokerages address it a little, because their fee is charged on every transaction – though since the seller in most instances is left to their own devices, I see these types of brokerages as more of a marketing facilitator than a real estate brokerage since the primary “service” is marketing the property through the MLS and then asking the buyer agents to contact the seller directly. Other business models that attempt to reduce the fees to the seller by reducing their services, face the same problem as the traditional brokerage if they do not make an upfront fee – and by doing so, the vast majority of consumers avoid them since they actually may have to write a check out of their bank account, instead of just having the proceeds check from their sale reduced!

Consumers could probably get brokerage services for less than they currently pay, if every buyer and seller paid their real estate professional on an hourly basis, like they pay their accountant or attorney or physician . But consumers know that they can list a house without writing a check, and for most people, that is a preferable arrangement, and doesn’t require a paradigm shift. So far, everyone that takes a run at restructuring the business runs up against that big brick wall. Someone somewhere, may someday crack the code and figure our a way to provide services that are paid for by the consumer in a different way, but they will face the difficult problem of convincing consumers that everything they think about how real estate professionals are paid is wrong, and that they can save money by spending money in advance of the sale but I don’t envy them that job, because consumers just won’t trust their good intentions. Like prepaid legal , some consumers may get involved, but the bulk of the clientele will, most likely, remain unmoved. 

So while we will continue to see people and companies referred to and marketing “discount” real estate services , I think the future, as the past, will continue to see that the consumer will continue to go to the cheapest out-of-pocket alternative. The brokerage where they take nothing out of their pocket until a closing is held, and spend nothing at all if they don’t sell or buy.